S & U: £24 Shares May Already Reflect Pandemic Recovery After New Loan Quality Remains At 5-Year High And Management Comments Of Property Profit Quintupling

22 April 2021
By Maynard Paton

Results summary for S & U (SUS):

  • A predictably Covid-blighted statement that confirmed extra write-offs of £19.5m, full-year profit diving almost 50% and the first annual dividend cut since at least 1987.
  • Various calculations indicate credit quality at SUS’s motor-finance division declined by approximately 10%, due mostly to payment holidays.
  • Management’s webinar comments claimed property-loan profit could quintuple to £5m within the next three years.
  • Reduced net debt, interest charges at 3% plus fresh borrowing facilities suggest no obvious funding concerns.  
  • The £24 shares may already reflect improved collection rates, recovering loan transactions, new loan quality at a five-year high and the generally upbeat directors. I continue to hold.

Contents

Event: Preliminary results and presentation for the twelve months to 31 January 2021 published 30 March 2021 and results webinar hosted 31 March 2021 (email registration required)

Price:
2,400p
Shares in issue: 12,145,260
Market capitalisation: £291m

Disclosure: Maynard owns shares in S & U. This blog post contains SharePad affiliate links.

Why I own SUS

  • Provides ‘non-prime’ credit to used-car buyers and property developers, where disciplined lending and reliable service have supported an enviable dividend record. 
  • Boasts veteran family management with 40-year-plus tenure, 50%-plus/£145m-plus shareholding and a “steady, sustainable” and organic approach to long-term growth.
  • Offers the prospect of improved post-pandemic fortunes based on enhanced credit scoring, extended marketing partnerships and promising diversification into property loans.

Further reading: My SUS Buy report | All my SUS posts | SUS website

Results summary

Revenue, profit and dividend

  • But updates during December and February had revealed encouraging commentary about the second half and the potential for recovery.
  • For the full year, revenue slipped 7% but profit dived almost 50% following an additional Covid-19 bad-debt provision of £19.5m:
  • The extra write-off meant profit fell back to levels last seen during 2016:
Year to 31 January20172018201920202021
Revenue (£k)60,52179,78182,97089,93983,671
Operating profit (£k)26,87132,97839,10139,98421,696
Other items (£k)-----
Finance cost (£k)(1,668)(2,818)(4,541)(4,850)(3,568)
Pre-tax profit (£k)25,20330,16034,56035,15418,128
Earnings per share (p)170.7203.8233.2239.6120.7
Dividend per share (p)91.0105.0118.0120.090.0
  • ….which meant the second half included a further £5.7m pandemic write-off.
  • The finance director implied during the H1 webinar that the initial £13.8m provision ought to have reflected the bulk of the pandemic bad loans:

We think [the £13.8m] is more of a one-off charge, it certainly should be, therefore the idea of IFRS 9 being forward looking is that you recognise some of the Covid impacts now as you understand them and then there’s only an adjustment going forward within the P&L account rather than another hit, unless we get hit by Covid-20 or Covid-21, in which case I will be wrong and I will come to you sheepishly and say that.

  • I was therefore surprised the Covid-19 provision for H1 was increased by 41% to £19.5m for the full year.
  • The finance director explained (not very sheepishly) during the latest webinar that the £5.7m H2 provision reflected the extra lockdowns, additional FCA payment holidays and further repossession restrictions experienced after the first half (i.e. from 01 August 2020).
  • Still, the lower pandemic provision for H2 versus H1 meant H2 2021 profit fell ‘only’ 35% from H2 2020 (from £18.1m to £11.8m):
  • The additional £19.5m Covid-19 provision related entirely to Advantage Finance, the group’s car-loan subsidiary.
  • The additional £19.5m Covid-19 provision meant Advantage’s run of 19 consecutive years of profit growth came to an abrupt end.
  • Despite the additional pandemic write-offs, Advantage continues to dominate SUS’s profitability:
  • SUS’s property-loan division, Aspen Bridging, delivered a very small profit although management was very confident of far greater future contributions (see Aspen Bridging).
  • These FY 2021 results unveiled a 43p per share final payout to give a total annual dividend of 90p per share.
  • The final dividend was reduced by 14% versus a 35% reduction to the H1 payout. 
  • The full-year dividend reduction was the first for SUS since its payout was reinstated during 1987:

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Advantage Finance: Loan provisions

  • The typical Advantage Finance customer has a patchy-but-improving credit history and borrows approximately £6.5k to buy a five-year-old used car.
  • The customer is then expected to pay back £11.7k over 52 months — equivalent to a flat c17% interest rate:
  • Customers are described by management as ‘non-prime’ — “borrowers that have had a problem in the past but are on an upward trend” (point 3).
  • Management noted on the webinar that customers on average repay £9.5k of the £11.7k expected.
  • Collecting £9.5k of £11.7k implies 18.8% (i.e. £2.2k/£11.7k) of money loaned is never repaid.
  • That 18.8% proportion is reflected by the c18% bad-debt provisions against total money loaned for FY 2019 and FY 2020 below:
Year to 31 January201920202021
Motor
Gross amounts receivable (£k)316,655344,131339,349
Less loan provision (£k)(57,845)(63,374)(92,583)
Net amounts receivable (£k)258,810280,757246,766
Loan provision/Gross amounts receivable (%)18.318.427.3
  • For this FY 2021, the bad-debt provision included the aforementioned Covid-19 charge of £19.5m and represented 27% of total money loaned.
  • The 27% proportion suggests SUS will now receive 73%, or £8.5k, of every £11.7k expected.
  • The chart below shows the effect of the extra Covid-19 provisions (grey boxes) on Advantage’s income:
  • Note the ordinary loan provision (blue boxes) for FY 2021 matched that recorded for FY 2020 (at £16.5m).
  • Note, too, that other costs (red boxes) for FY 2021 reduced by 30% (to £13.6m) due mostly to processing 33% fewer new loans (from c23k to c16k).
  • Management described Advantage’s overall performance as “very creditable“.

Advantage Finance: Credit quality 

  • SUS said:

This year, despite the payment holidays which affected nearly 21,000 of our customers and resulted in an estimated £13m lower collection, total cash collected at Advantage was £180m against £196m last year.

This resulted in a monthly collection rate against contractual due of nearly 84% (2020: 94%) which, despite Covid, reflects the excellent relationships Advantage has always enjoyed with its customers.

  • Total cash collected declining by £16m to £180m implies an 8% reduction to credit quality.
  • Monthly collection rates declining from 94% to 84% implies an 11% reduction to credit quality.
  • The 8% to 11% deterioration to credit quality is supported by various other calculations. 
  • Collecting the aforementioned £8.5k instead of the usual £9.5k from each £11.7k expected suggests an 11% reduction to credit quality.
  • The following table shows revenue (i.e. loan interest received) per customer dropping 10% to £1,253 during FY 2021:
H1 2020H2 2020FY 2020H1 2021H2 2021FY 2021
Revenue (£k)42,08943,37685,46541,18738,36679,553
Average no. of customers60,57163,11261,66763,84963,12963,488
Revenue/customer (£)1,3901,3751,3861,2901,2151,253
  • This next table shows total revenue (i.e. loan interest received) from every £1 of outstanding loans dropping 12% to 23.3p during FY 2021:
H1 2020H2 2020FY 2020H1 2021H2 2021FY 2021
Revenue (£k)42,08943,37685,46541,18738,36679,553
Average gross amounts receivable (£k)324,785338,523330,393343,751341,360341,740
Revenue per £1 gross amount receivable (p)25.925.625.924.022.523.3
  • Revisiting that earlier table…
Year to 31 January201920202021
Motor
Gross amounts receivable (£k)316,655344,131339,349
Less loan provision (£k)(57,845)(63,374)(92,583)
Net amounts receivable (£k)258,810280,757246,766
Loan provision/Gross amounts receivable (%)18.318.427.3
  • …total bad-debt provisions increased by almost £30m to £93m during FY 2021.
  • That £30m represents an extra 9% of the total loans outstanding of £339m.
  • The presentation slide below shows loans arranged during FY 2015 — that is, with the subsequent five-year repayments barely affected by the pandemic — generating total cash collections representing 145% of the initial money lent:
  • The same slide also reckons loans arranged during FY 2021 — that is, with the subsequent five-year repayments affected heavily by the pandemic — could generate total cash collections representing 131% of the initial money lent.
  • Total cash collections declining from 145% to 131% implies a 10% reduction to credit quality.
  • As far as I can tell, the above calculations all point to the pandemic causing credit quality to decline by between 8% and 12%.
  • I would have gratefully accepted credit quality declining by between 8% and 12% at the start of the pandemic.

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Advantage Finance: Payment holidays

  • The lower credit quality relates mostly to the payment holidays allowed by the FCA. 
  • The last FCA update on the subject was published on 25 March 2021 and noted:
    • Borrowers could apply for payment holidays until 31 March 2021;
    • Borrowers could take total payment holidays of up to six months;
    • All payment holidays will end on 31 July 2021, and;
    • Repossession restrictions had been lifted on 31 January 2021. 
  • SUS has previously expressed frustration at the payment holidays. In fact, management claimed during the H1 webinar that 40% of customers that had enjoyed a payment holiday were not financially affected by the pandemic.
  • The preceding H1 results said 16,500 Advantage customers had taken a payment holiday. This FY 2021 statement said the number had risen to nearly 21,000, although the presentation slides suggested the figure was closer to 19,000:
  • £242m owed by 62,751 accounts suggests each Advantage customer has on average £3,857 still to repay.
  • 3,728 customers were taking a payment holiday at the 31 January 2021 year end, and may still owe Advantage a total of approximately £14m (3,728*£3,857).
  • 15,040 customers had concluded a payment holiday before the 31 January 2021 year end, and may still owe Advantage a total of approximately £58m.
  • Note that 30.62% of accounts that had taken a payment holiday were more than six months behind with their payments:
  • With payment holidays lasting no more than six months, this 30.62% cohort appears not to have recommenced payments.
  • But on the flip side, 69.38% of post-holiday accounts were less than six months in arrears, which might suggest the majority of holiday-payment customers have recommenced payments.
  • The recommencement of payments from holiday accounts is underlined by the improving collections rate. 
  • And then the February update said monthly collections had “improved to 90% of contractual terms due“.
  • For comparison, the collection rate for the comparable FY 2020 was 94%.

Advantage Finance: New loans

  • New car loans issued during H2 matched the number issued during H1:
  • SUS reckoned new loans came with better credit quality:

This year has seen further strengthening of [Advantage’s] under-writing “black box” as it has continued to widen its use of credit information and refine its scorecard… Evidence of the improvement in customer repayments this should bring about is in our first payment statistics which at 98.5% are now up on pre-Covid levels.

  • The presentation indicated Equifax had joined Experian and TransUnion as data suppliers to Advantage’s “underwriting black box“:
  • Advantage’s first-payment statistics remain encouraging:
  • The blue line (left axis) reflects the percentage of customers making their first payment on time.
  • At 98.5%, the proportion is back to levels last seen five years ago. 
  • The unbroken red line (right axis) shows the actual ‘outcome loss ratio’, which correlates strongly to the first-payment percentage. 
  • The dotted red line (right axis) shows the predicted ‘outcome loss ratio’, which has diverged slightly from the blue line to reflect the greater uncertainty of repayments following the pandemic.
  • Management has previously mentioned the first-payment improvement from 2007 to 2012 was due to the banking crash prompting rivals to withdraw from the sector.
  • During that time Advantage faced less competition for its target ‘non-prime’ customers.
  • Competition then returned and credit quality therefore softened, until the pandemic prompted much tighter underwriting and other lenders to hibernate once again.
  • The implication — perhaps — is that the blue line can remain favourable in a manner similar to that experienced between 2007 and 2012.
  • Management implied on the webinar that Advantage enjoyed a 10% market share of the non-prime sector, with Moneybarn, owned by Provident Financial, at 30%-35%.
  • With a better quality of customer, perhaps the number of new car loans does not need to recover to pre-Covid levels for Advantage’s profit to recover to pre-Covid levels. 

Aspen Bridging

  • Established four years ago, Aspen offers property bridging loans for small/individual property developers/investors with awkward financial circumstances. 
  • To date £111m has been lent through 234 property loans with a monthly interest rate of approximately 1% and a typical term of 11 months. These case studies give a flavour of the transactions involved:
  • Aspen’s profit rebounded strongly during H2 following the lockdown-depressed H1:
  • Aspen lent a bumper £32m through 55 new agreements during H2. By comparison, H1 witnessed £11m lent through 25 new loans while FY 2020 witnessed £31m lent through 57 new loans.
  • Aspen did not suffer any Covid-19 write-downs. SUS in fact confirmed:

Loan quality has improved over the past year and Aspen now has no loans past due and no defaults over the entire book.

  • S&U claimed a more competitive product range, new broker relationships and incentivised “key partners” had helped create the promising outcome. 
  • A combination of a revitalised housing market and loans backed by property (and not used cars) presumably assisted Aspen’s progress.
  • SUS was bullish on Aspen’s future, saying the improved loan quality had given the division…:

… both the base and the momentum for… substantial growth it expects in the coming year.  As a result, our deliberately cautious investment in the business is anticipated to double during the coming year and this is expected to deliver a significant rebound in profits.” 

  • Management comments on the webinar were even more optimistic, with talk of a £5m Aspen profit within two to three years. 
  • A £5m Aspen profit represents a quintupling of the division’s £0.8m FY 2021 contribution. 
  • Management also mentioned on the webinar that Aspen’s return on capital employed (ROCE) could be “12% at scale“.
  • Attaining a £5m profit from a 12% ROCE implies invested capital of £42m is required.
  • For perspective, Aspen reported its £0.8m profit on assets of £34m for this FY 2021.
  • Aspen’s assets of £34m comprised 69 agreements of an c£493k average and represented 14% of the group’s entire net loan book.
  • The appointment could signal Aspen becoming of greater importance to the wider group.  

Financials

  • Fewer transactions during FY 2021 (total advances dropped from £180m to £146m) meant collections went towards reducing debt rather than funding new customer loans.
  • Net debt finished the year £19m lower at £99m:
Year to 31 January20172018201920202021
Operating profit (£k)26,87132,97839,10139,98421,696
Depreciation (£k)253294414450520
Net capital expenditure (£k)(308)(1,040)(785)(265)(1,112)
Working-capital movement (£k)(48,488)(68,881)(19,041)(24,067)20,901
Net debt (£k)(49,167)(104,990)(108,037)(117,844)(98,794)
  • SUS’s working-capital movements broadly show the net effect of new money loaned versus repayments received.
  • During the years preceding FY 2021, working-capital movements were always negative as SUS reinvested customer repayments into new loans.
  • The £21m positive working-capital movement for the year was derived mostly during H1:
H1 2020H2 2020FY 2020H1 2021H2 2021FY 2021
Operating profit (£k)19,41020,57439,9848,29813,39821,696
Working-capital movement (£k)(20,717)(3,350)(24,067)18,8042,09720,901
Other cash-flow movements (£k)(5,234)(5,737)(10,971)(6,183)(3,474)(9,657)
Operating cash flow (£k)(6,541)11,4874,94620,91912,02132,940
  • The aforementioned bumper lending by Aspen during H2 probably caused the lower cash generation during the second half.
  • After a net £19m was used to repay debt, full-year cash flow from operations of £14m was used to fund dividends of £13m and capital expenditure of £1m.
  • Bank interest during the twelve months was £3.5m, implying SUS’s borrowings incur interest at approximately 3%. The implied rate for H2 was lower at 2.8%.
  • The 2020 annual report (point 16) claimed SUS borrows money from mainstream banks at 4% to then lend out at 28%.
  • The wide, 24% net interest margin is required to cover debt impairments and operating costs, and in turn earn a respectable return on the capital employed (see below).
  • The annual interest payment was covered a reasonable 9-10x by operating cash flow. 
  • Net debt of £99m compares to a group net loan book of £281m.
  • SUS’s lenders do not seem too worried about the group’s borrowings. This FY 2021 statement revealed more debt had been taken on: 

Over the next two years our growth prospects and strategy will require additional funding.  This is why post year-end we have put in place additional longer-term facilities of £50m on terms up to eight years.  This provides total committed Group facilities of £155m which will be augmented as required.

  • After omitting the stats at the half year, SUS reported Advantage’s ROCE was 8.6% and risk-adjusted yield was 16.4%.

Note: risk-adjusted yield is a ‘profit margin’ KPI used by SUS and is calculated as:
(revenue – loan provision) / average outstanding customer loans 

  • SUS did not include the usual slide showing Advantage’s ROCE and risk-adjusted yield, so I have amended last year’s slide below: 
  • Advantage’s ratios were of course depressed by the extra Covid-19 loan impairments.
  • The group’s overall margin and return on equity were impacted as well:
Year to 31 January20172018201920202021
Operating margin (%)44.441.347.144.525.9
Return on average equity (%)15.216.717.616.88.1
  • How the ratios perform from here remains very relevant to shareholders. 
  • I am hopeful Advantage’s ROCE and risk-adjusted yield will eventually return to pre-pandemic levels (and the missing slide can therefore return). 
  • SUS maintains a tiny defined-benefit pension scheme that last carried a surplus (point 18).

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Valuation

  • Management sounded a confident tone for recovery:

Although uncertainty still surrounds the economic climate following Covid, the skies are definitely brightening.”

“My confidence in our superb staff, our financial strength and sound strategy allows me to predict a return to S&U’s habitual levels of success.

“All this means that S&U’s habitual caution should now be seasoned with ambition and optimism for the next two years.

“We fully expect to see a gradual and sustained rebound in Group Profits.  Current initiatives in both businesses may even accelerate this recovery.”

  • The share price has responded and no longer trades anywhere close to the depressed book-value levels of last year:
(Source: SharePad)
  • In fact, the recent £24 price was occasionally seen prior to the pandemic… suggesting upside potential from a full earnings recovery is now quite limited.
  • These shares have typically traded on a very average/modest multiple. The £28 peak achieved during May 2018 equated to a trailing P/E of 13.7. 
  • The recent share-price revival seem understandable and may reflect:
    • The end to payment holidays, a return to greater collections and no further Covid-19 write-offs;
    • Potential market-share gains as competitors struggle with their lower-quality loans;
    • A history of recovering well following the banking crash;
    • Enhanced “black box” calculations leading to new customer quality at a five-year high;
    • Much higher profits from Aspen;
    • Promising initiatives such as affinity schemes, comparison websites and electric-vehicle funding, and/or;
    • Sale volumes at Advantage perhaps having recovered to 100% of the pre-pandemic budget:
  • Possibly the main support for a likely recovery is the presence of canny veteran executives, who through various family parties control at least 50% of SUS and have been involved at the company since the mid-1970s.
  • The 2020 annual report (point 7) reminded shareholders of the long-term benefit of these owner-managers:

Family investment and management has over the last 80 years been reflected in ambition for growth and for new markets buttressed by a conservative approach to risk, to treasury activities and to return on capital employed…”

Mr Anthony Coombs was appointed Chairman in 2008 as part of an established succession plan reflecting the Coombs family’s majority holding in S&U, the identity of interest between management and shareholders and the consequent success of the Company.”

  • The “conservative approach to risk” appears to have proven its worth during this FY 2021.
  • While a profit recovery is awaited, the 90p per share dividend gives a 3.75% income at £24.

Maynard Paton

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3 thoughts on “S & U: £24 Shares May Already Reflect Pandemic Recovery After New Loan Quality Remains At 5-Year High And Management Comments Of Property Profit Quintupling”

  1. S & U (SUS)

    Directorate changes published 14 April 2021

    Very possibly a significant boardroom development for two reasons — the growing influence of Aspen Bridging, and long-term executive succession.

    Here is the full text:

    ———————————————————————————————————–
    S&U plc (LSE: SUS), the specialist motor finance and bridging lender, announces that in the light of his family’s relocation to Switzerland, Fiann Coombs will not be seeking re-election as a Director of S&U plc at the forthcoming AGM and will therefore be resigning from the role on the AGM date of 20th May 2021. The Board would like to thank Fiann for his wise and astute advice and guidance over the 19 years he has been a Director.

    S&U plc separately announces the appointment of Jack Coombs to the Board of S&U plc as an Executive Director with immediate effect. Jack is a 33-year-old Chartered Accountant who joined the S&U Group in 2016 as Group Development Executive, having previously worked in PwC’s Valuations team. Jack is Fiann’s brother and he is a major shareholder in S&U plc owning 1,677,147 ordinary shares representing 13.82% of total voting rights. He is currently working as a Director of our successful and profitable property bridging subsidiary Aspen Bridging Limited.’
    ———————————————————————————————————–

    I must admit I was not sure whether Jack Coombs was future leadership material. Seems like Jack’s uncles, brothers Anthony and Graham Coombs (executive chairman and executive deputy chairman respectively), have decided he could be. Jack Coombs is in his 30s while Anthony and Graham Coombs are both late-60s.

    Jack Coombs received the bulk of his 1.7m shares from Jennifer Coombs during August last year (RNSs here and here). 1.7m shares at £24 each is £40m. The 2020 annual report said brother Fiann owned 284k shares worth £7m. I note Jack’s 1.7m shares exceed the 1.3m owned by Anthony Coombs and the 1.6m owned by Graham Coombs.

    The blog post above recounts management webinar remarks of Aspen aiming for profit of £5m (versus <£1m for FY 2021), and this appointment I reckon says that growth prospect is more than just the usual optimism from company directors.

    Reply
  2. Hi Maynard,

    Great article on a company which I have a lot of admiration for, and hold shares. Your analysis of the impact of the pandemic on credit quality is very good. I like the way you have looked at it from a number of angles.

    I watched the presentation on Investor Meet Company and was surprised at how bullish Mr Coombs was (not naturally bullish character). I was also very impressed by the lengths they went to answer all of the questions put to them. This is quite unusual in my experience and shows an alignment with shareholders.

    I am hoping that the H2 additional bad debt provision will prove to be over cautious and can be partially reversed in due course due to better receipts. I suspect they would have been forced by auditors to put through very prudent provisions, as the year end was at the height of the recent lock down. So I would hope this will surprise on the upside in due course.

    One bear point:
    Upstart.com
    Comment noted from a post on Stockopedia. This is an American “disrupter” which is looking at the application of AI to consumer credit lending. It is something to have in the back on mind when thinking about an investment in this industry as I would have thought there is potential for AI to significantly impact insurance in the future. Upstart talk about :
     Higher approval rates
     Lower loss rates, therefore lower cost for everyone
     Automated experience for customers, reducing cost

    Reply
    • Hi James

      Glad you found the blog post of use. Must admit getting my head around all the stats took a while. Yes, management was bullish on the IMC webinar, especially on the property side. The text in the results RNS was a tad more optimistic than usual as well. So the omens seem positive. Management did answer lots of questions on the webinar, although I must admit some of the questions were somewhat unsophisticated and would have been answered from reading the annual report. A good alignment of shareholders does exist, and the next generation of Coombs has been appointed to the main board. So I am hopeful that alignment can continue for some time.

      Good point on AI. Not something I had considered. If AI genuinely works, then the entire lending and perhaps insurance industries could be ripe for disruption. Of course the lenders may adopt/apply AI themselves. The credit-scoring agencies may be at risk here. If SUS can apply AI to its own data without the need for external credit-scoring info, then maybe SUS could benefit. Also, management has said the company “sells to people, not algorithms” (point 3) — and I dare say an experienced employee could determine a good borrower from a bad borrower during a phone conversation, unlike an AI computer perhaps.

      Maynard

      Reply

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